Deutsche Bank shares (NYSE: DB), one of the world’s leading investment banks, gained around 22%, from around $ 11 at the start of 2020 to around $ 13 currently, outperforming the S & P500, which rose 14% in during the same period.
There were two clear reasons for this: First, the approval of the $ 1.9 trillion stimulus package in the United States Second, the accelerated vaccination campaign against Covid-19 in the United States and Europe. The above two factors give weight to forecasts of a strong economic recovery (Note – Deutsche Bank originally reported in € (euros), the same has been converted to USD for ease of comparison).
But is that all there is in the story?
Not quite, says Trefis Deutsche Bank valuation at around $ 12 per share – around 8% below the current market price – based on a key opportunity and risk factor.
The first opportunity we see is Deutsche Bank revenues growth in subsequent quarters. Deutsche Bank reported 2020 revenue of $ 27.4 billion, up 6% year-on-year, mainly driven by 33% year-on-year growth in the investment banking segment . The division benefited from higher trading volumes and a surge in subscriptions as a result of the Covid-19 crisis and the economic slowdown. While the bank has seen growth in investment banking, it has experienced a 15% year-over-year decline in its net interest income, which contributes around 50% of total income. Notably, the NII fell due to headwinds on interest rates which reduced the bank’s net interest margin. In addition, the same trend also continued in the first quarter of fiscal 2021. DB reported net income of $ 8.7 billion, up 25% year-on-year, mainly on a jump of 44 % of the investment banking division, partially offset by a 6% decrease in the NII. That said, the growth of investment banking is directly linked to an increase in transaction and subscription volumes, which should normalize in the coming quarters. But, until then, the division is expected to generate quarterly results. In addition, Deutsche Bank’s asset management division recorded 35% year-on-year growth in the first quarter. It was driven by growth in assets under management (AuM), which reached $ 989 billion at the end of the first quarter, up 9% from the $ 905 billion figure at the end of 2020. In the Together, we expect DB’s revenue to hold steady at around $ 29.2 billion. for fiscal year 2021.
Deutsche Bank’s net profit margin is expected to improve in 2021. The bank increased its allowance for credit losses in 2020 from $ 810 million to $ 2 billion. We expect provisions to decline over the next few months as the economy recovers. In addition, operating expenses are expected to decrease somewhat during the current year. All in all, this should translate to EPS of $ 1.16, which when paired with a P / E multiple just below 11x, will lead to a valuation of around $ 12.
Finally, how much should the market pay per dollar of Deutsche Bank profit? Well, to earn almost $ 1.16 a year from a bank today, you would have to deposit about $ 116 into a savings account, which is about 100 times the desired earnings. At the current Deutsche Bank share price of around $ 13, we’re talking about a P / E multiple just above 11x. And we think it’s appropriate.
That said, banking is a risky business right now. Growth looks less promising in the core banking sector, and the near-term outlook is less encouraging. What is behind this?
Deutsche Bank has a large loan portfolio and is very sensitive to changes in interest rates. It increased its provisions for credit losses in 2020 to offset the increased risk of default. While the provision figure has declined in recent quarters, suggesting some recovery in the economy, any sudden increase in Covid-19 cases or worsening economic conditions can expose DB to significant defaults. Additionally, interest rate headwinds will likely affect the bank’s net interest margin, which will negatively impact net interest income. To sum up, we think Deutsche Bank stock is somewhat overvalued.
Do you think Bitcoin could disrupt the banking industry? Looking for the benefit of adopting Bitcoin, without buying into the cryptocurrency itself? You can find out more about our theme at Cryptocurrency actions here.